Item 1A. Risk Factors
Any investment in our common Shares involves a high degree of risk.
The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. If any
of these risks actually occur, our business, financial condition, prospects, results of operations or cash flow could be materially and
adversely affected, and you could lose all or a part of the value of your investment. Additional risks or uncertainties not currently
known to us, or that we deem immaterial, may also negatively affect our business operations.
In addition, on May 7, 2021, Acasti entered into a merger agreement
with Grace, pursuant to which, subject to the approval of Acasti shareholders and the satisfaction or waiver of the conditions set forth
in the merger agreement, Grace would become a wholly-owned subsidiary of Acasti, referred to herein as the merger.
Risks Related to the Merger
The equity exchange ratio will not be adjusted in the event of any
change in Acasti's share price.
If the merger is completed, at the effective time of the merger, each issued
and outstanding share of Grace common stock will automatically be converted into the right to receive a number of Acasti common shares
per share of Grace common stock equal to the equity exchange ratio set forth in the merger agreement such that, immediately following
the consummation of the merger, existing Acasti shareholders are expected to own at least 55% and existing Grace stockholders are expected
to own at most 45% of the outstanding capital stock of the combined company on a fully-diluted basis. The equity exchange ratio is subject
to upward adjustment in favor of Acasti shareholders based on each company’s capitalization and net cash balance at the effective
time of the merger, as specified in the merger agreement. For more information on the equity exchange ratio, see the merger agreement
filed as exhibit 2.1 to this annual. The equity exchange ratio will not be adjusted for changes in the market price of Acasti common shares.
As a result, changes in the price of Acasti common shares prior to completion of the merger will affect the market value of the share
considerations that Grace stockholders will receive in the merger. Changes in the Acasti common share price may result from a variety
of factors (many of which are beyond Acasti’s control), including the following:
• market assessments of the likelihood that the merger will be completed; and
The price of Acasti common shares at the closing of the merger may vary
from the price on the date the merger agreement was executed, the date of this annual report and the date of the annual and special meeting
of Acasti shareholders. As a result, the market value of the merged entity will also vary. For example, based on the range of closing
prices of Acasti common shares during the period from May 6, 2021, which was the last trading day before the public announcement of the
execution of the merger agreement, through June 18, 2021, the estimated equity exchange ratio represented a market value ranging from
a low of approximately $2.47 to a high of approximately $3.07 for each share of Grace common stock.
Because the merger will be completed after the date of the Acasti
annual and special shareholders meeting and the Grace stockholder approval, you will not know, at the time of the Acasti annual and special
shareholder meeting or the Grace stockholder approval, the market value of the Acasti common shares that Grace stockholders will receive
upon completion of the merger.
If the price of Acasti common shares increases between the time of the
Acasti annual and special meeting or the Grace stockholder approval and the time at which Acasti common shares are distributed to Grace
stockholders following completion of the merger, Grace stockholders will receive Acasti common shares that have a market value that is
greater than the market value of such shares at the time of the Acasti annual and special meeting or the Grace stockholder approval. Conversely,
if the price of Acasti common shares decreases between the time of the Acasti annual and special meeting or Grace stockholder approval
and the time at which Acasti common shares are distributed to Grace stockholders following completion of the merger, Grace stockholders
will receive Acasti common shares that have a market value that is less than the market value of such shares at the time of the Acasti
annual and special meeting or the Grace stockholder approval. Therefore, Grace stockholders and Acasti shareholders will not have certainty
at the time of the Acasti annual and special meeting or the Grace stockholder approval of the market value of the consideration that will
be paid to Grace stockholders upon completion of the merger.
Failure to complete the merger could negatively impact the share
prices and the future business and financial results of Acasti.
If the merger is not completed, the ongoing businesses of Acasti may be
adversely affected. Additionally, if the merger is not completed and the merger agreement is terminated, in certain circumstances, either
Acasti or Grace may be required to pay to the other a termination fee of $1,000,000 including any reimbursement the other party’s
expenses up to a maximum of $500,000. Even if a termination fee or expenses of the other party are not payable in connection with a termination
of the merger agreement, Acasti has incurred significant transaction expenses in connection with the merger regardless of whether the
merger is completed. The foregoing risks, or other risks arising in connection with the failure of the merger, including the diversion
of management attention from conducting the business of Acasti and pursuing other opportunities during the pendency of the merger, may
have an adverse effect on the business, operations, and financial results of Acasti as well the price of Acasti common shares. In addition,
Acasti could be subject to litigation related to any failure to consummate the merger transaction or any related action that could be
brought to enforce a party’s obligations under the merger agreement.
The merger agreement contains provisions that could discourage a
potential competing acquirer of either Acasti or Grace.
The merger agreement contains “no shop” provisions that, subject
to limited exceptions, restrict Acasti’s and Grace’s ability to solicit, encourage, facilitate, or discuss competing third
party proposals to acquire shares or assets of Acasti or Grace. In specified circumstances, upon termination of the merger agreement,
Acasti or Grace will be required to pay the termination fee to the other party. In the event that either Acasti or Grace receives an alternative
acquisition proposal, the other party has the right to propose changes to the terms of the merger agreement before the Acasti or Grace
board of directors may withdraw or qualify its recommendation with respect to the merger and related transactions.
These provisions could discourage a potential competing acquirer that might
have an interest in acquiring all or a significant part of Acasti from considering or proposing that acquisition, even if it were prepared
to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the merger,
or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because
of the added expense of the termination fee that may become payable in specified circumstances. Acasti’s and Grace’s right
to match specified alternative acquisition proposals with respect to the other party could also discourage potential competing acquirers
from considering or proposing that acquisition.
If the merger agreement is terminated and Acasti determines to seek another
transaction, it may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the merger.
The merger may be completed even though certain events occur prior
to the closing that materially and adversely affect Acasti or Grace.
The merger agreement provides that either Acasti or Grace can refuse to
complete the merger if there is a material adverse change affecting the other party prior to the closing. However, certain types of changes
do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on Acasti
or Grace, including, among others:
· any natural disaster;
· changes or developments in or relating to currency exchange or interest rates;
· changes or developments affecting the pharmaceutical industry in general;
· a share consolidation of Acasti.
If an adverse change occurs and Acasti and Grace still complete the merger,
the business, operations or prospects of the combined company, or the market price of its common shares, may suffer. This in turn may
reduce the value received by the shareholders of Acasti in connection with the merger.
If the conditions to the merger are not satisfied or waived, the
merger may not occur. If the merger is consummated, it will result in substantial dilution to Acasti shareholders and may not deliver
the anticipated benefits Acasti expects.
Even if the merger is approved by the shareholders of Acasti and the stockholders
of Grace, specified other conditions must be satisfied or waived to complete the merger. These conditions are set forth in the merger
agreement filed as exhibit 2.1 to this annual report. Acasti cannot assure you that all of the conditions will be satisfied or waived.
Certain of the closing conditions are legally incapable of being waived. If the conditions are not satisfied or waived, the merger may
not occur or will be delayed, and Acasti may lose some or all of the intended benefits of the merger. If consummated, the merger will
result in dilution to Acasti’s shareholders and could result in other restrictions that may affect its business. Further, if completed,
the merger ultimately may not deliver the anticipated benefits or enhance shareholder value.
The combined company may become involved in securities class action
litigation that could divert management’s attention and harm the combined company’s business and insurance coverage may not
be sufficient to cover all costs and damages.
In the past, securities class action or shareholder derivative litigation
often follows certain significant business transactions, such as the sale of a business division or announcement of a merger. The combined
company may become involved in this type of litigation in the future. Litigation is often expensive and diverts management’s attention
and resources, which could adversely affect the combined company’s business.
Acasti has received notice from Nasdaq of non-compliance with the
Nasdaq Listing Rules.
On May 11, 2021, Acasti received written notice from the Nasdaq Listing
Qualifications Department notifying Acasti that based upon Acasti’s non-compliance with the $1.00 bid price requirement set forth
in Nasdaq Listing Rule 5550(a) as of May 10, 2021, Acasti securities were subject to delisting unless the Company timely requested a hearing
before the Nasdaq Hearings Panel.
Acasti requested a hearing, which stayed any further action by Nasdaq pending
the conclusion of the hearing process.
At the hearing, on June 17, 2021, Acasti presented a detailed plan of compliance
for the Nasdaq Listing Panel’s consideration, which included Acasti’s commitment to implement a share consolidation if needed
to evidence compliance with Nasdaq listing rules. Acasti expects to receive the Nasdaq Listing Panel’s decision 30 days after the
hearing date. There can be no assurance that Nasdaq will accept Acasti’s plan or that Acasti will be able to regain compliance with
Nasdaq’s listing rules or maintain compliance with any other Nasdaq requirement in the future. The approval by Nasdaq of (i) the
continued listing of Acasti’s common shares on Nasdaq following the effective time and (ii) the listing of the Acasti common shares
being issued in connection with the merger on Nasdaq at or prior to the effective time are conditions to the closing of the merger.
We may be subject to foreign exchange rate fluctuations.
Our reporting currency is the U.S. dollar. However, many of our expenses
are denominated in foreign currencies, including Canadian dollars. As we previously completed financings in both Canadian and U.S. dollars,
both currencies are maintained and used to make required payments in the applicable currency. Though we plan to implement measures designed
to reduce our foreign exchange rate exposure, the U.S. dollar/Canadian dollar and U.S. dollar /European euro exchange rates have fluctuated
significantly in the recent past and may continue to do so, which could have a material adverse effect on our business, financial position
and results of operations.
Risks Related to Intellectual Property
We may not realize any additional value
in a strategic transaction for our intellectual property.
The market capitalization of our corporation is
or may be below the value of our cash, cash equivalents and marketable securities at the time of consummation of any strategic transaction.
Although the CaPre clinical trial failed to meet its primary endpoints, we believe that data from preclinical and other clinical studies
of CaPre may support potential further investigation and development activities. However, potential counterparties in a strategic transaction
involving our corporation may place minimal or no value on our assets, given the limited data regarding their potential application. Further,
the development and any potential commercialization of investigational CaPre will require substantial additional funding associated with
conducting the necessary clinical testing and obtaining regulatory approval. Consequently, any potential counterparty in a strategic transaction
involving our corporation may choose not to spend additional resources and continue development of CaPre and may attribute little or no
value, in such a transaction, to CaPre or our other intellectual property.
It is difficult and costly to protect our intellectual property rights.
It is possible that our patents and/or proprietary technologies in the
future could be circumvented through the adoption of competitive, though non-infringing, processes or products. The patent positions of
pharmaceutical companies can be highly uncertain and involve complex legal, scientific and factual questions for which important legal
principles remain unresolved. Changes in either the patent laws or in interpretations of patent laws may diminish the value of our intellectual
property. We cannot predict the breadth of claims that may be allowable or enforceable in our patents, or of patents licensed to us.
We face risks that:
· our trade secrets could be learned independently by our competitors;
Further, patents have a limited lifespan. In the United States, a patent
generally expires 20 years after it is filed (or 20 years after the filing date of the first non-provisional U.S. patent application to
which it claims priority). While extensions may be available, the life of a patent, and the protection it affords, is limited. Further,
the extensive period of time between patent filing and regulatory approval for a product candidate limits the time during which we can
market that product candidate under patent protection. Patents owned by third parties could have priority over patent applications filed
or in-licensed by us, or we or our licensors could become involved in interference, opposition or invalidity proceedings before U.S.,
Canadian or foreign patent offices. The cost of defending and enforcing our patent rights against infringement charges by other patent
holders may be significant and could limit our operations.
We may be involved in lawsuits to protect or enforce our patents
or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents or the patents of our licensors. To
counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. If
we or our licensors were to initiate legal proceedings against a third party to enforce a patent our technology, the defendant could counterclaim
that our or our licensor’s patent is invalid or unenforceable. In patent litigation, defendant counterclaims alleging invalidity
or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements;
for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone
connected with prosecution of the patent withheld relevant information from the patent office, such as the USPTO, or made a misleading
statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable.
With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we or our licensors
and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability,
we would lose at least part, and perhaps all, of the patent protection or certain aspects of our platform technology. Such a loss of patent
protection could have a material adverse impact on our business. Patents and other intellectual property rights also will not protect
our technology if competitors design around our protected technology without legally infringing our patents or other intellectual property
rights.
In addition, in an infringement proceeding, a court may refuse to stop
the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse
result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable,
or interpreted narrowly and could put our patent applications at risk of not issuing. Defense of these claims, regardless of their merit,
would involve substantial litigation expense and would be a substantial diversion of employee resources from our business.
Interference proceedings provoked by third parties or brought by the USPTO
may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors.
An unfavorable outcome could result in a loss of our current patent rights and could require us to cease using the related technology
or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us
a license on commercially reasonable terms, or at all. Litigation or interference proceedings may result in a decision adverse to our
interests and, even if we are successful, may result in substantial costs and distract our management and other employees. We may not
be able to prevent, alone or with our licensors, misappropriation of our trade secrets or confidential information, particularly in countries
where the laws may not protect those rights as fully as in the United States and Canada. Furthermore, because of the substantial amount
of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings,
motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could
have a substantial adverse effect on the price of our common shares.
Obtaining and maintaining our patent protection depends on compliance with
various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection
could be reduced or eliminated for non-compliance with these requirements.
Changes in patent law could diminish the value of patents in general,
thereby impairing our ability to protect product candidates.
Numerous recent changes to the patent laws and proposed changes to the
rules of the various patent offices around the world may have a significant impact on our ability to protect our technology and enforce
our intellectual property rights. These changes may lead to increasing uncertainty with regard to the scope and value of our issued patents
and to our ability to obtain patents in the future.
Once granted, patents may remain open to opposition, re-examination, post-grant
review, inter partes review, nullification derivation and opposition proceedings in court or before patent offices or
similar proceedings for a given period after allowance or grant, during which time third parties can raise objections against the initial
grant. In the course of any such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to
limit the scope of the allowed or granted claims attacked or may lose the allowed or granted claims altogether. Depending on decisions
by authorities in various jurisdictions, the laws and regulations governing patents could change in unpredictable ways that may weaken
our and our licensors’ ability to obtain new patents or to enforce existing patents we and our licensors or partners may obtain
in the future.
We may not be able to protect our intellectual property rights throughout
the world.
Many companies have encountered significant problems in protecting and
defending intellectual property rights in foreign jurisdictions. The legal systems of some countries, particularly certain developing
countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult
for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings
to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other
aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk
of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the
damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property
rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop
or license.
Risks Relating to Our Common Shares
The price of our common shares may be volatile.
Market prices for pharmaceutical companies can fluctuate significantly.
Factors such as the announcement to the public or in various scientific or industry forums of technological innovations; new commercial
products; patents or exclusive rights obtained by us or others; disputes or other developments relating to proprietary rights, including
patents, litigation matters and our ability to obtain patent protection for our technologies; the commencement, enrollment or announcement
of results of clinical trials we conduct, or changes in the development status of our product candidates; results or delays of pre-clinical
and clinical studies by us or others; any delay in our regulatory filings for our product candidates and any adverse development or perceived
adverse development with respect to the applicable regulatory authority’s review of such filings; a change of regulations; additions
or departures of key scientific or management personnel; overall performance of the equity markets; general political and economic conditions;
publications; failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;
research reports or positive or negative recommendations or withdrawal of research coverage by securities analysts; actual or anticipated
variations in quarterly operating results; announcements of significant acquisitions, strategic partnerships, joint ventures or capital
commitments by us or our competitors; public concerns over the risks of pharmaceutical products and dietary supplements; unanticipated
serious safety concerns related to the use of our product candidates; the ability to finance, future sales of securities by us or our
shareholders; and many other factors, many of which are beyond our control, could have considerable effects on the price of our common
shares. The price of our common shares has fluctuated significantly in the past and there can be no assurance that the market price of
our common shares will not experience significant fluctuations in the future.
In addition, pharmaceutical companies often experience extreme price and
volume fluctuations that are unrelated or disproportionate to the operating performance of those companies. Broad market and industry
factors may negatively affect the market price of our common shares, regardless of our actual operating performance. In the past, securities
class action litigation has often been instituted against pharmaceutical companies following periods of volatility in the market price
of their securities. This type of litigation, if instituted against us, could result in substantial costs and a diversion of management’s
attention and resources, which would harm our business, operating results or financial condition.
Raising additional capital may cause dilution to our existing shareholders,
restrict our operations or require us to relinquish rights to our technologies or product candidates.
We may need to raise additional capital in order to execute on our business
plan. We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships
and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt
securities, the ownership interests of our shareholders will be diluted, and the terms may include liquidation or other preferences that
adversely affect the rights of our shareholders. The incurrence of indebtedness by us would result in increased fixed payment obligations
and could involve certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability
to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct
our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties,
we may have to relinquish valuable rights to our technologies or product candidates or grant licenses on terms unfavorable to us.
The market price of our common shares could decline as a result of
operating results falling below the expectations of investors or fluctuations in operating results each quarter.
Our net losses and expenses may fluctuate significantly and any failure
to meet financial or clinical expectations may disappoint securities analysts or investors and result in a decline in the price of our
common shares. Our net losses and expenses have fluctuated in the past and are likely to do so in the future. The market price of our
common shares has fluctuated significantly in the past and may continue to do so. Some of the factors that could cause the market price
for our common shares to fluctuate include the following:
· the fluctuations in valuation of our derivative warrant liabilities;
· the outcome of any litigation;
· changes in foreign currency fluctuations;
· competition;
· additions and departures of key personnel;
· changes in general market and economic conditions.
If our quarterly operating results fall below the expectations of investors
or securities analysts, the market price of our common shares could decline substantially. Furthermore, any quarterly fluctuations in
our operating results may, in turn, cause the market price of our common shares to fluctuate substantially. We believe that quarterly
comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
There can be no assurance that an active market for our common shares
will be sustained.
There can be no assurance that an active market for our common shares will
be sustained. Holders of common shares may be unable to sell their investments on satisfactory terms. As a result of any risk factor discussed
herein, the market price of our common shares at any given point in time may not accurately reflect our long-term value. Furthermore,
responding to these risk factors could result in substantial costs and divert management’s attention and resources. Substantial
and potentially permanent declines in the value of our common shares may adversely affect the liquidity of the market for our common shares.
Other factors unrelated to our performance that may have an effect on the
price and liquidity of our common shares include: positive or negative industry or competitor news; extent of analyst coverage; lessening
in trading volume and general market interest in our common shares; the size of our public float; and any event resulting in a delisting
of our common shares.
A large number of common shares may be issued and subsequently sold
upon the exercise of existing warrants. The sale or availability for sale of existing warrants or other securities convertible into common
shares may depress the price of our common shares.
As of March 31, 2021, there were 15.6 million common shares issuable under
outstanding warrants at various exercise prices. To the extent that holders of existing warrants sell common shares issued upon the exercise
of warrants, the market price of our common shares may decrease due to the additional selling pressure in the market. The risk of dilution
from issuances of common shares underlying existing warrants may cause shareholders to sell their common shares, which could further contribute
to any decline in our common share market price.
Any downward pressure on the price of our common shares caused by the sale
of common shares issued upon the exercise of existing warrants could encourage short sales by third parties. In a short sale, a prospective
seller borrows common shares from a shareholder or broker and sells the borrowed common shares. The prospective seller anticipates that
the common share price will decline, at which time the seller can purchase common shares at a lower price for delivery back to the lender.
The seller profits when the common share price declines because it is purchasing common shares at a price lower than the sale price of
the borrowed common shares. Such short sales of common shares could place downward pressure on the price of our common shares by increasing
the number of common shares being sold, which could lead to a decline in the market price of our common shares.
We do not currently intend to pay any cash dividends on our common
shares in the foreseeable future.
We have never paid any cash dividends on our common shares and we do not
anticipate paying any cash dividends on our common shares in the foreseeable future because, among other reasons, we currently intend
to retain any future earnings to finance our business. The future payment of cash dividends will be dependent on factors such as cash
on hand and achieving profitability, the financial requirements to fund growth, our general financial condition and other factors our
board of directors may consider appropriate in the circumstances. Until we pay cash dividends, which we may never do, our shareholders
will not be able to receive a return on their common shares unless they sell them.
If we fail to meet applicable listing requirements, the NASDAQ Stock
Market or the TSXV may delist our common shares from trading, in which case the liquidity and market price of our common shares could
decline.
Our common shares are currently listed on the NASDAQ Stock Market and the
TSXV, but we cannot assure you that our securities will continue to be listed on the NASDAQ Stock Market and the TSXV in the future. In
the past, we have received notices from the NASDAQ Stock Market that we have not been in compliance with its continued listing standards,
and we have taken responsive actions and regained compliance.
On February 28, 2020, we received written notification from the NASDAQ
Listing Qualifications Department for failing to maintain a minimum bid price of $1.00 per share for the preceding 30 consecutive business
days, as required by NASDAQ Listing Rule 5550(a)(2) – bid price (the “Minimum Bid Price Rule”). Under NASDAQ Listing
Rule 5810(c)(3)(A) – compliance period, we initially had 180 calendar days to regain compliance.
On April 17, 2020, we were informed that NASDAQ had granted temporary regulatory
relief related to its minimum bid price requirement due to the COVID-19 pandemic for all NASDAQ-listed companies and therefore extended
the deadline for us to regain compliance to November 9, 2020.
On November 11, 2020, we were further informed that NASDAQ had granted
an additional 180 calendar days, or until May 10, 2021, for us to regain compliance.
On May 11, 2021, we received notice from the Nasdaq Listing Qualifications
Department indicating that, based upon our non-compliance with the $1.00 bid price requirement set forth in (the Minimum Bid Price Rule)
as of May 10, 2021, our common shares were subject to delisting unless we timely requested a hearing before the Nasdaq Hearings Panel
(the “Panel”).
We requested and were granted a hearing on June 17, 2021, which will stay
any further action by Nasdaq pending the conclusion of the hearing process.
At the hearing, we presented a detailed plan of compliance for the Panel’s
consideration, which included our commitment to implement a share consolidation if needed to evidence compliance with the Minimum Bid
Price Rule. Should we determine that a share consolidation is necessary or otherwise advisable to regain compliance with the Minimum Bid
Price Rule, we would likely take such action concurrently with the completion of our proposed acquisition of Grace.
If we fail to comply with listing standards and the NASDAQ Stock Market
or TSXV delists our common shares, we and our shareholders could face significant material adverse consequences, including:
· a limited availability of market quotations for our common shares;
· reduced liquidity for our common shares;
· a limited amount of news about us and analyst coverage of us; and
We may pursue opportunities or transactions that adversely affect
our business and financial condition.
Our management, in the ordinary course of our business, regularly explores
potential strategic opportunities and transactions. These opportunities and transactions may include strategic joint venture relationships,
significant debt or equity investments in us by third parties, the acquisition or disposition of material assets, the licensing, acquisition
or disposition of material intellectual property, the development of new drug candidates, significant distribution arrangements, the sale
of our common shares and other similar opportunities and transactions. The public announcement of any of these or similar strategic opportunities
or transactions might have a significant effect on the price of our common shares. Our policy is to not publicly disclose the pursuit
of a potential strategic opportunity or transaction unless we are required to do so by applicable law, including applicable securities
laws relating to periodic disclosure obligations. There can be no assurance that investors who buy or sell common shares are doing so
at a time when we are not pursuing a particular strategic opportunity or transaction that, when announced, would have a significant effect
on the price of our common shares.
In addition, any such future corporate development may be accompanied by
certain risks, including exposure to unknown liabilities relating to the strategic opportunities and transactions, higher than anticipated
transaction costs and expenses, the difficulty and expense of integrating operations and personnel of any acquired companies, disruption
of our ongoing business, diversion of management’s time and attention, and possible dilution to shareholders. We may not be able
to successfully overcome these risks and other problems associated with any future acquisitions and this may adversely affect our business
and financial condition.
We are a “smaller reporting company” under the SEC’s
disclosure rules and have elected to comply with the reduced disclosure requirements applicable to smaller reporting companies.
We are a “smaller reporting company” under the SEC’s
disclosure rules, meaning that we have either:
· a public float of less than $250 million; or
o no public float; or
o a public float of less than $700 million.
As a smaller reporting company, we are permitted to comply with scaled-back
disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive
compensation in our periodic reports and proxy statements. We have elected to adopt the accommodations available to smaller reporting
companies. Until we cease to be a smaller reporting company, the scaled-back disclosure in our SEC filings will result in less information
about our company being available than for other public companies.
If investors consider our common shares less attractive as a result of
our election to use the scaled-back disclosure permitted for smaller reporting companies, there may be a less active trading market for
our common shares and our share price may be more volatile.
As a non-accelerated filer, we are not required to comply with the
auditor attestation requirements of the Sarbanes-Oxley Act.
We are a non-accelerated filer under the Securities Exchange Act of 1934,
as amended, or the Exchange Act, and we are not required to comply with the auditor attestation requirements of Section 404(b) of the
Sarbanes-Oxley Act of 2002. Therefore, our internal controls over financial reporting will not receive the level of review provided by
the process relating to the auditor attestation included in annual reports of issuers that are subject to the auditor attestation requirements.
In addition, we cannot predict if investors will find our common shares less attractive because we are not required to comply with the
auditor attestation requirements. If some investors find our common shares less attractive as a result, there may be a less active trading
market for our common shares and trading price for our common shares may be negatively affected.
U.S. investors may be unable to enforce certain judgments.
We are a company existing under the Business Corporations Act (Québec).
Some of our directors and officers are residents of Canada, and substantially all of our assets are currently located outside the United
States. As a result, it may be difficult to effect service within the United States upon us or upon some of our directors and officers.
Execution by U.S. courts of any judgment obtained against us or any of our directors or officers in U.S. courts may be limited to assets
located in the United States. It may also be difficult for holders of securities who reside in the United States to realize in the United
States upon judgments of U.S. courts predicated upon civil liability of us and our directors and executive officers under the U.S. federal
securities laws. There may be doubt as to the enforceability in Canada against non-U.S. entities or their controlling persons, directors
and officers who are not residents of the United States, in original actions or in actions for enforcement of judgments of U.S. courts,
of liabilities predicated solely upon U.S. federal or state securities laws.
There is a significant risk that we may be classified as a PFIC for
U.S. federal income tax purposes.
Current or potential investors in our common shares who are U.S. Holders
(as defined below) should be aware that, based on our most recent financial statements and projections and given uncertainty regarding
the composition of our future income and assets, there is a significant risk that we may have been classified as a “passive foreign
investment company” or “PFIC” for the taxable year that ended on March 31, 2021, and may be classified as a PFIC for
our current taxable year and possibly subsequent years. If we are a PFIC for any year during a U.S. Holder’s holding period of our
common shares, then such U.S. taxpayer generally will be required to treat any gain realized upon a disposition of such common shares
or any so-called “excess distribution” received on such common shares, as ordinary income (with a portion subject to tax at
the highest rate in effect), and to pay an interest charge on a portion of such gain or excess distribution. In certain circumstances,
the sum of the tax and the interest charge may exceed the total amount of proceeds realized on the disposition, or the amount of excess
distribution received, by the U.S. Holder. Subject to certain limitations, a timely and effective QEF Election (as defined below) under
Section 1295 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, or a Mark-to-Market Election (as defined below) under
Section 1296 of the Code may be made with respect to the common shares. A U.S. Holder who makes a timely and effective QEF Election generally
must report on a current basis its share of our net capital gain and ordinary earnings for any year in which we are a PFIC, whether or
not we distribute any amounts to our shareholders. A U.S. Holder who makes the Mark-to-Market Election generally must include as ordinary
income each year the excess of the fair market value of their common shares over the holder’s basis therein. This paragraph is qualified
in its entirety by the discussion under the heading “Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities - U.S. Federal Income Tax Considerations of the Acquisition, Ownership, and Disposition of Common
Shares - Passive Foreign Investment Company Rules” and does not take into account any changes to the composition of our income and
assets resulting from the merger. Each current or potential investor who is a U.S. Holder should consult its own tax advisor regarding
the U.S. federal, state and local, and non-U.S. tax consequences of the acquisition, ownership, and disposition of our common shares,
the U.S. federal tax consequences of the PFIC rules, and the availability of any election that may be available to the holder to mitigate
adverse U.S. federal income tax consequences of holding shares in a PFIC.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our head office and operations are located at 3009 boul. de la Concorde
East, Suite 102, Laval, Québec, Canada H7E 2B5 and our research and development and quality control laboratory is located at Espace
Lab, 2650 Maximilien-Chagnon, Sherbrooke, Québec, Canada, J1E 0M8. We currently lease our office and laboratory space. We do not
own our own manufacturing facility to produce CaPre; however, we do own the proprietary equipment for producing the related active pharmaceutical
ingredient, or API, and drug product.
Item 3. Legal Proceedings
Due to the fact that a portion of our intellectual property rights are
licensed to us by Neptune/Aker, we rely on Neptune/Aker to protect a certain of the intellectual property rights that we use under our
license agreement with Neptune/Aker. Neptune/Aker are engaged in a number of legal actions related to their intellectual property.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Market Information
Our common shares are traded on The Nasdaq Capital Market and the TSX Venture
Exchange under the symbol “ACST.”
Holders
As of June 22, 2021, there were approximately 26 holders of record of our
common shares. The actual number of shareholders is greater than this number of record holders and includes shareholders who are beneficial
owners but whose shares are held in street name by brokers and other nominees.
Dividends
We do not anticipate paying any cash dividend on our common shares in the
foreseeable future. We presently intend to retain future earnings to finance the expansion and growth of our business. Any future determination
to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations,
capital requirements and other factors the board of directors deems relevant. In addition, the terms of any future debt or credit facility
may preclude us from paying dividends.
Taxation
The following is a summary of certain U.S. federal income tax considerations
arising from and relating to the acquisition, ownership, and disposition of our common shares to a U.S. Holder (as defined below) as capital
assets.
This summary provides only general information and does not purport to
be a complete analysis or listing of all potential U.S. federal income tax consequences that may apply to a U.S. Holder as a result of
the acquisition, ownership, and disposition of our common shares. In addition, this summary does not take into account the individual
facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences applicable to that U.S.
Holder. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with
respect to any U.S. Holder. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, state and local, and non-U.S.
tax consequences arising from or relating to the acquisition, ownership, and disposition of our common shares.
No legal opinion from U.S. legal counsel or ruling from the Internal Revenue
Service, or IRS, has been requested, or will be obtained, regarding the U.S. federal income tax consequences to U.S. Holders of the acquisition,
ownership, and disposition of our common shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position
that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary
is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in
this summary.
Scope of this Disclosure
Authorities
This summary is based on the Code, U.S. Treasury Regulations promulgated
thereunder (whether final, temporary or proposed), published IRS rulings, judicial decisions, published administrative positions of the
IRS, and the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September
26, 1980, as amended (the Canada-U.S. Tax Treaty), in each case, as in effect as of the date of this report. Any of the authorities on
which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive
basis. Unless otherwise discussed, this summary does not discuss the potential effects, whether adverse or beneficial, of any proposed
legislation.
U.S. Holders
For purposes of this summary, a “U.S. Holder” is a beneficial
owner of common shares that, for U.S. federal income tax purposes, is (a) an individual who is a citizen or resident of the United States,
(b) a corporation, or other entity classified as a corporation for U.S. federal income tax purposes, that is created or organized in or
under the laws of the U.S., any state in the United States or the District of Columbia, (c) an estate if the income of such estate is
subject to U.S. federal income tax regardless of the source of such income, or (d) a trust if (i) such trust has validly elected to be
treated as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to exercise primary supervision over the administration
of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not
Addressed
This summary does not address the U.S. federal income tax consequences
applicable to U.S. Holders that are subject to special provisions under the Code, including, but not limited to, the following U.S. Holders:
(a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax deferred
accounts; (b) U.S. Holders that are financial institutions, insurance companies, real estate investment trusts, or regulated investment
companies; (c) U.S. Holders that are dealers in securities or currencies or U.S. Holders that are traders in securities that elect to
apply a mark-to-market accounting method; (d) U.S. Holders that have a “functional currency” other than the U.S. dollar; (e)
U.S. Holders subject to the alternative minimum tax provisions of the Code; (f) U.S. Holders that own common shares as part of a straddle,
hedging transaction, conversion transaction, integrated transaction, constructive sale, or other arrangement involving more than one position;
(g) U.S. Holders that acquired common shares through the exercise of employee stock options or otherwise as compensation for services;
(h) U.S. Holders that hold common shares other than as a capital asset within the meaning of Section 1221 of the Code; (i) U.S. Holders
that beneficially own (directly, indirectly or by attribution) 10% or more of our equity securities (by vote or value); and (j) U.S. expatriates.
U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described above, should consult their own tax
advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S.
tax consequences arising from and relating to the acquisition, ownership, and disposition of the common shares.
If an entity or arrangement that is classified as a partnership for U.S.
federal income tax purposes holds common shares, the U.S. federal income tax consequences to that partnership and the partners of that
partnership generally will depend on the activities of the partnership and the status of the partners. Partners of entities that are classified
as partnerships for U.S. federal income tax purposes should consult their own tax advisors regarding the U.S. federal income tax consequences
arising from and relating to the acquisition, ownership and disposition of the common shares.
Tax Consequences Other than U.S. Federal Income Tax Consequences
Not Addressed
This summary does not address the U.S. estate and gift, alternative minimum,
state, local or non-U.S. tax consequences to U.S. Holders of the acquisition, ownership, and disposition of our common shares. Each U.S.
Holder should consult its own tax advisor regarding the U.S. estate and gift, alternative minimum, state, local and non-U.S. tax consequences
arising from and relating to the acquisition, ownership, and disposition of our common shares.
U.S. Federal Income Tax Considerations of the Acquisition, Ownership,
and Disposition of Common Shares
Distributions on Common Shares
Subject to the discussion under “—Passive Foreign Investment
Company Rules” below, a U.S. Holder that receives a distribution, including a constructive distribution or a taxable stock distribution,
with respect to the common shares generally will be required to include the amount of that distribution in gross income as a dividend
(without reduction for any Canadian income tax withheld from such distribution) to the extent of our current or accumulated “earnings
and profits” (as computed for U.S. federal income tax purposes). To the extent that a distribution exceeds our current and accumulated
“earnings and profits”, the excess amount will be treated (a) first, as a tax-free return of capital to the extent of a U.S.
Holder’s adjusted tax basis in the common shares with respect to which the distribution is made (resulting in a corresponding reduction
in the tax basis of those common shares) and, (b) thereafter, as gain from the sale or exchange of those common shares (see the more detailed
discussion at “—Disposition of Common Shares” below). We do not intend to calculate our current or accumulated earnings
and profits for U.S. federal income tax purposes and, therefore, will not be able to provide U.S. Holders with that information. U.S.
Holders should therefore assume that any distribution by us with respect to our common shares will constitute a dividend. However, U.S.
Holders should consult their own tax advisors regarding whether distributions from us should be treated as dividends for U.S. federal
income tax purposes. Dividends paid on our common shares generally will not be eligible for the “dividends received deduction”
allowed to corporations under the Code with respect to dividends received from U.S. corporations.
A dividend paid by us generally will be taxed at the preferential tax rates
applicable to long-term capital gains if, among other requirements, (a) we are a “qualified foreign corporation” (as defined
below), (b) the U.S. Holder receiving the dividend is an individual, estate, or trust, and (c) the dividend is paid on common shares that
have been held by the U.S. Holder for at least 61 days during the 121-day period beginning 60 days before the “ex-dividend date”
(i.e., the first date that a purchaser of the common shares will not be entitled to receive the dividend).
For purposes of the rules described in the preceding paragraph, we generally
will be a “qualified foreign corporation”, or a QFC, if (a) we are eligible for the benefits of the Canada-U.S. Tax Treaty,
or (b) our common shares are readily tradable on an established securities market in the United States, within the meaning provided in
the Code. However, even if we satisfy one or more of the requirements, we will not be treated as a QFC if we are classified as a PFIC
(as discussed below) for the taxable year during which we pay the applicable dividend or for the preceding taxable year. The dividend
rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of those rules to them in their particular
circumstances. Even if we satisfy one or more of the requirements, as noted below, there can be no assurance that we will not be a PFIC
in the current taxable year or become a PFIC in the future. Thus, there can be no assurance that we will qualify as a QFC.
Disposition of Common Shares
Subject to the discussion under “—Passive Foreign Investment
Company Rules” below, a U.S. Holder will recognize gain or loss on the sale or other taxable disposition of common shares (that
is treated as a sale or exchange for U.S. federal income tax purposes) equal to the difference, if any, between (a) the U.S. dollar value
of the amount realized on the date of the sale or disposition and (b) the U.S. Holder’s adjusted tax basis (determined in U.S. dollars)
in the common shares sold or otherwise disposed of. Any such gain or loss generally will be capital gain or loss, which will be long-term
capital gain or loss if the common shares are held for more than one year. A U.S. Holder's initial tax basis in the common shares generally
will equal the U.S. dollar cost of such common shares. Each U.S. Holder should consult its own tax advisor as to the tax treatment of
dispositions of common shares in exchange for Canadian dollars.
Preferential tax rates apply to long-term capital gains of a U.S. Holder
that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a U.S. Holder that
is a corporation. Deductions for capital losses are subject to complex limitations.
Passive Foreign Investment Company Rules
If we are or become a PFIC, the preceding sections of this summary may
not describe the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of our common shares.
Passive Foreign Investment Company Status.
Special, generally unfavorable, rules apply to the ownership and disposition
of the stock of a PFIC. For U.S. federal income tax purposes, a non-U.S. corporation is classified as a PFIC if:
Passive income generally includes the following types of income:
In determining whether we are a PFIC, we will be required to take into
account a pro rata portion of the income and assets of each corporation in which we own, directly or indirectly, at least 25% by value.
As described above, PFIC status of a non-U.S. corporation depends on the
relative values of certain categories of assets and the relative amount of certain kinds of income for a taxable year. Therefore, our
status as a PFIC for any given taxable year depends upon the financial results for such year and upon relative valuations, which are subject
to change and beyond our ability to predict or control. Based on our most recent financial statements and projections and given uncertainty
regarding the composition of our future income and assets, there is a significant risk that we may have been classified as a PFIC for
the taxable year that ended on March 31, 2021, and may be classified as a PFIC for our current taxable year and possibly subsequent years.
However, PFIC status is fundamentally factual in nature, depends on the application of complex U.S. federal income tax rules (which are
subject to differing interpretations), generally cannot be determined until the close of the taxable year in question and is determined
annually. In addition, in evaluating the risk that we may be classified as a PFIC for our current taxable year and subsequent years, we
have not taken into account any changes to the composition of our income and assets that may result from the merger. Accordingly, there
can be no assurance that we will not be a PFIC in our current taxable year or subsequent years. The PFIC rules are complex, and each U.S.
Holder should consult its tax advisor regarding the application of the PFIC rules to us.
Default PFIC Rules Under Section 1291 of the Code.
Generally, if we are or have been treated as a PFIC for any taxable year
during a U.S. Holder’s holding period of common shares, subject to the special rules described below applicable to a U.S. Holder
who makes a Mark-to-Market Election or a QEF Election (each as defined below), any “excess distribution” with respect to the
common shares would be allocated ratably over the U.S. Holder’s holding period. The amounts allocated to the taxable year of the
excess distribution and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable
year would be subject to tax at the highest rate in effect for individuals or corporations in that taxable year, as appropriate, and an
interest charge would be imposed on the amount allocated to that taxable year. Distributions made in respect of common shares during a
taxable year will be excess distributions to the extent they exceed 125% of the average of the annual distributions on common shares received
by the U.S. Holder during the preceding three taxable years or the U.S. Holder’s holding period, whichever is shorter. In addition,
dividends generally will not be qualified dividend income if we are a PFIC in the taxable year of payment or the preceding year.
Generally, if we are treated as a PFIC for any taxable year during which
a U.S. Holder owns common shares, any gain on the disposition of the common shares would be treated as an excess distribution and would
be allocated ratably over the U.S. Holder’s holding period and subject to taxation in the same manner as described in the preceding
paragraph and would not be eligible for the preferential long-term capital gains rate.
Certain elections (including the Mark-to-Market Election and the QEF Election,
as defined and discussed below) may sometimes be used to mitigate the adverse impact of the PFIC rules on U.S. Holders, but these elections
may accelerate the recognition of taxable income and have other adverse results.
Each current or prospective U.S. Holder should consult its own tax advisor
regarding potential status of us as a PFIC, the possible effect of the PFIC rules to such holder in their particular circumstances, information
reporting required if we were treated as a PFIC and the availability of any election that may be available to the holder to mitigate adverse
U.S. federal income tax consequences of holding shares in a PFIC.
QEF Election.
A U.S. Holder of common shares in a PFIC generally would not be subject
to the PFIC rules discussed above if the U.S. Holder had made a timely and effective election (a “QEF Election”) to treat
us as a “qualified electing fund” (a “QEF”). Instead, such U.S. Holder would be subject to U.S. federal income
tax on its pro rata share of our (i) net capital gain, which would be taxed as long-term capital gain to such U.S. Holder,
and (ii) ordinary earnings, which would be taxed as ordinary income to such U.S. Holder, in each case regardless of whether such amounts
are actually distributed to such U.S. Holder. However, a U.S. Holder that makes a QEF Election may, subject to certain limitations, elect
to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation,
any such interest paid will be treated as “personal interest,” which is not deductible.
A U.S. Holder that makes a timely and effective QEF Election generally
(a) may receive a tax-free distribution from us to the extent that such distribution represents our “earnings and profits”
that were previously included in income by such U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s
tax basis in the common shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election.
In addition, for U.S. federal income tax purposes, a U.S. Holder that makes a timely QEF Election generally will recognize capital gain
or loss on the sale or other taxable disposition of the common shares.
A QEF Election will be treated as “timely” if such QEF Election
is made for the first taxable year in the U.S. Holder’s holding period for the common shares in which we are a PFIC. A U.S. Holder
may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income